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New Credit Card Law Punishes Responsible People

If your credit is good, or your credit card balance is low, you may soon pay more on every credit card bill. Why? Congress passed a misguided new credit card law, the Credit Card Accountability Responsibility and Disclosure Act of 2009. As a result of it, you may end up paying an annual fee. And you may end up losing your percentage rebates, your cash back, or your rewards program.

The new law arbitrarily limits credit card companies’ ability to increase rates on credit card balances, even when a cardholder’s balance has been rapidly increasing — meaning that a sensible bank might raise the interest rate, because a rising balance drives up the risk that the credit card company won’t get paid what it’s owed. (Increasing numbers of credit cardholders have run up big balances in recent years, then failed to pay them off).

In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers’ percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.

One of my co-workers just emailed me that he has recently been notified that he will be charged an annual fee on what he calls “the best reward card I ever found.” It’s the same card I use for many of my purchases.

The new law is supposed to “protect” cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.

If you make it harder for credit card companies to charge risky people higher rates than responsible people, they’ll increase rates for everyone, or make it harder for people to get credit cards in the first place.

That’s how it used to be, a generation ago, before the Supreme Court ruled in 1978 that states couldn’t restrict the interest rates charged by out-of-state credit card companies (in the Marquette National Bank case). States set strict limits on how much interest credit card companies could charge their citizens — even those who were high-risk borrowers with bad credit. As a result, many people couldn’t even get credit cards, and the vast majority of consumers got charged an annual fee.

That ended after the Supreme Court said states couldn’t regulate credit card companies outside their borders. That killed off most state regulation, since most credit card companies moved to states like South Dakota that didn’t restrict interest rates. As law and economics professor Todd Zywicki notes, consumers benefited enormously from this: “The effect was to unleash an era of extraordinary competition and pro-consumer financial innovation. Marquette spurred competition and innovation, leading to vast improvements in payment card services for consumers along with the elimination of annual fees on cards, lower interest rates, and the beneficial uncoupling of retail and credit transactions, thereby permitting the rise of the Internet and small businesses.”

The new federal law imposes some of the same archaic burdens that existed before 1978, and it will have many of the same bad results.

As economists and banking experts have noted, state credit regulations “often backfire, hurting the very consumers that they are intended to protect by making credit more expensive and less available.” State interest-rate ceilings, for example, “dry up the flow of credit to the low-income and high-risk borrowers” and force some “borrowers to turn to loan sharks and disguised loans.”

In other countries which restrict credit card interest rates more, it’s much harder to get a credit card, annual fees are rampant, and rewards programs basically don’t exist. My wife is from France, where there are stricter limits on the interest banks can charge credit cardholders. As a result, she never could get a credit card in France, even though she always had money in the bank, and never missed a payment on anything. She finally managed to get a debit card, but was charged an annual fee for it.

Only after she came to America, which has less regulation, did she manage to get a credit card. Her credit cards came with rebates and no annual fee. But thanks to the regulations in the new credit card law, she may soon lose her cash back and get charged an annual fee.

Earlier, the government pushed through $250 billion in mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Commercial lawyer John Hinderaker notes, “Congress has just enacted new credit card regulations intended to limit banks’ ability to collect money from distressed or incompetent customers. The New York Timesexplains the consequences:

‘It will be a different business,’ said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. ‘Those that manage their credit well will in some degree subsidize those that have credit problems.’